GM May Be On The Hook For Pre-Bankruptcy Liabilities

One of the commonly understood virtues of filing for bankruptcy is that your pre-bankruptcy liabilities get wiped out. For individuals, this means that credit card debt or medical bills get wiped clean and creditors can’t come back years down the line and demand payment. The same is true for corporations. Those who have emerged from bankruptcy, especially those sold to new buyers after going into bankruptcy, expect a clean slate, something that makes buyers willing to take the risk of buying such companies in the first place.

A recent decision by the Supreme Court potentially throws that into doubt, at least according to some people. The issue concerns the 2009 bankruptcy of General Motors. At the time, the bankruptcy was odd and broke a number of supposed rules. For one thing, the unions were able to get more than their rightful share of the company’s assets, part of a deal worked out after the federal government stepped in and bought a huge stake in the automaker. Another unusual aspect of the bankruptcy is that the Supreme Court recently refused to hear an appeal that, if left standing, could result in the post-bankruptcy GM being found liable for pre-bankruptcy actions.

The specific issue involves the ignition switches that GM has admitted are defective in vehicles made prior to GM’s bankruptcy filing. When GM filed for bankruptcy and then had its assets put up for sale, known as a Section 363 sale, the buyer of those assets, known as New GM, expected to start with a clean slate. In fact, the purchase agreement included what’s known as a “free and clear” clause. This clause is seen as a powerful motivating factor that encourages buyers to take a chance on struggling companies as it offers them protection from pre-bankruptcy liabilities. In this case, the ignition switch lawsuits.

Individuals harmed by the ignition switches have tried suing New GM, claiming that the company actively withheld information from the public about the defect and, as a result, should give them the right to sue the new company for damages. After all, they did not get an opportunity to bring the claims before the old company’s assets were sold. In such a case, they argue that successor liability is appropriate.

Though GM won the argument at the lower level, the case eventually made its way to the Second Circuit Court of Appeals, which surprised many when it reversed the lower court. By doing so, it exposed New GM to legal liability for claims that occurred prior to bankruptcy. GM then appealed the ruling to the Supreme Court, which just rejected that request, sending the case back to the Second Circuit.

It’s important to note that this doesn’t mean that GM will be liable for anything. All the Second Circuit’s ruling does is allow plaintiffs to bring suit against New GM for issues related to the faulty ignition switches. Those plaintiffs will still have to establish sufficient standing to bring their cases and then present compelling evidence that GM should be held responsible for causing harm to its customers. The decision by the Second Circuit simply gives them the right to try.

If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.